ABX Weekly 24th October 2018 Market update
The risk averse mood in share markets continued, with the S&P500 down as much as 1.5% to the lowest since May, and European and Asian indices shedding between 1% and 3%. US 10yr treasury yield fell from 3.18% to 3.11%, the 2yr yield from 2.89% and 2.85%. Fed fund futures yields reduced the chance of another rate hike in December, from 85% to 75%.
Not trying to bear more bad news but property clearance rates in Australia are also on the decline. While the median prices have only slightly dropped there are concerns that with the banks lending less there could be a sudden and significant drop in prices.
Brewin’ with Nguyen
This week is not all bad news though, I’ve been getting a few enquires on what happens to bonds when interest rates move. And this is where the beauty of bonds come into play. Because they have a maturity date it is easy to calculate your return on your investment the day you purchase the bond.
Things that you know the day you purchase a bond:
- Exactly what you get in coupons every 6 months
- Your face value and the last coupon back at maturity
- What you paid for the bond today
Knowing these things, you can work backwards to calculate your return on your investment when you hold it to maturity. When I quote a yield to maturity (YTM) of 5.50%, that is the return you will get on your investment every year.
Because all those things are fixed, the bonds aren’t subjected to the market fluctuation unless you must sell the bond prior to maturity. Whether interest rates go up or down, when you hold to maturity you get the same return!
This is what gives bonds the defensive asset class reputation and attracts investors that desire certainty on their income.
I have less certainty of where I put my keys every morning!
The slide on the European markets is continuing and the major German stock market index, the Dax, is at its lowest point since 2017. The headlines out of Italy continue to keep investors on their toes and nobody is expecting any significant positive surprises from the upcoming economic indicators such as the German IFO survey or the ECB meeting on Thursday. Our traders on the Frankfurt Stock Exchange are reporting that they are seeing capital moving out of Italy into the Germany Bunds (which are the German Government bonds) and the yields for Italian 10-year bonds have more than doubled to 3.75% since May this year. In addition, major Rating Agency S&P will update the market on Friday if there are downgrading Italy’s debt rating.
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Check the crack teams insights here: ABX weekly 24/10/2018
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